How do I measure performance?

As we saw from the Stock Performance level, it is important to look at the price movements within a period, as opposed to just looking at the Total Return Rate.

A good way to characterize price movements is to analyze daily return rates (i.e., return rate from one day to the next).

  • Why return rate? It’s the relative gains or losses (return rates) that matter, not the absolute prices. Every security has a different price range. Return rates provide the normalization needed across different price ranges.  See the Price Chart and the Return Rate Chart.

  • Why daily? Using the daily return rates allows us to characterize the price movement between the period rather than Total Return Rate, which measures the rate on only two points in time, beginning and the end, skipping the price movement in between.

However, when we work with daily return rates, there is one data point per day (see the Return Rate Chart). That's a lot of data points. One way to summarize daily return rates is Mean Return Rate, which is the mean (or average) all the daily return rates during the period.

Think of Mean Return Rate as the middle value.

If you were to count up how many of the daily returns rates into bins, constructing a distribution (see Distribution of Return Rates), Mean Return Rate is middle point in the distribution (see "Mean Return Rate" in the Distribution of Return Rates chart).

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Market Basics Challenge

Diversification Challenge